Monday, 9 July 2012

Brussels fires blanks

Eurocrats continue their attack on wealth not derived from syphoning off gravy from large public slush funds with a hunt on the wildebeest herds of fund managers feeding upon European pastures; the FT reports;

“Existing pay policies create incentives for fund managers to take excessive risk, lead to short-term decision making and must be revamped to protect investors, according to the European Commission.”

The irony is most asset managers don’t take enough risk! They hug the index like mad and charge investors 75bps a year for the privilege. The perverse incentive is that the way to make money is to take as little risk as possible whilst marketing as hard as possible to gain the largest pool of assets. The IM industry is all about scale and the reason top managers earn so much is scalability.

Of course most ‘long term institutional investors’ have a timeframe of about one quarter. They may pretend to be long term, and they are long term; until you have a bad quarter. So the idea that pay deals on a 3-5 year basis align fund manager interests with those of investors is also incorrect.

So the Eurocrats have totally missed the point here;

“Dan Waters, managing director of ICI Global, an industry trade body, rejected any suggestion that bonus structures were problematic. "“We are not living in a world where anyone thinks Ucits funds have been managed by fund managers who are causing funds to be damaged,”

“Nobody has said remuneration strategies and structures are a problem. Nobody has offered any evidence of that,” he said.””

Bus alas democracy or transparency is not necessary in the great ‘resentiment’ against all things finance:

“Didier Millerot, deputy head of asset management at the Commission, said the proposals were viewed as “non-controversial”, and were likely to be adopted before the end of the year.”

Fund managers much like banks like to have a lot of variable pay so they can cut costs during the regular downturns of the business/asset cycle. In addition increased regulation of recent decades has already raised the fixed costs of the business as the armies of auditors and compliance officers must be paid heavily fixed compensation.

So what happens when you increase the labour rigidity in the industry by raising fixed compensation and multi year deferred remuneration? Nobody moves jobs or is incentivised to improve performance (sounds like French industry!). Instead they just get fired. Maybe portfolio managers need a union?

I am not sure why the EU thinks excessive risk taking is even an issue. If a fund manager screws up the firm will hemorrhage assets Gartmore style and collapse with shareholders getting wiped out. This is called capitalism and nobody sheds a tear. These aren't banks who craftily moved from the 'heads I win tails you lose' risk model to the current nipple of the ECB funding milk to continue to enjoy the high life. In fact the banks' actions make it clear the the best long trade around right now is to declare yourself 'to big to fail' and get a seat at the gravy train.

If you really want a better system then fixed fees should equal manager’s basic expenses and all other remuneration would be performance fee based against benchmarks or total return as per the mandate with claw-backs. But under that scenario who’d bother to run a fund manager anyway because you cant turn any kind of consistent profit.

To know this you might actually have to consult with the people you intend to regulate. That clearly would be too much effort as the bubble of smug surrounding the town of Brussels is becoming increasingly impermeable.

“The only thing that saves us from the bureaucracy is inefficiency. An efficient bureaucracy is the greatest threat to liberty.”

- Eugene McCarthy

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